Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Programming Note: We’ll be off this Monday for Memorial Day but will be back in your inboxes on Tuesday. Even as the U.S. moves closer to a potential default, Moody’s is still bullish that President Joe Biden and House Speaker Kevin McCarthy can avoid the worst. William Foster, a senior vice president and senior credit officer in Moody's Sovereign Risk Group, said his team expects policymakers to reach an agreement before June 1 — which would spare Treasury from having to prioritize payments on government debt. Even if that were to happen, the odds of the U.S. missing an interest payment on its bonds remains very low and a downgrade from Moody’s remains unlikely, he said. But, but, but: The ratings service’s outlook on the U.S. sovereign credit — now stable — could shift. “If we got past the X-Date where we're in a period where there was prioritization of payments — and interest was continuing to be paid, but other payments were missed — we would have to reassess at that point,” Foster said in a conversation with POLITICO’s financial services team on Monday. Treasury Secretary Janet Yellen over the weekend offered a glimpse of what payments her department would have to make if Congress fails to raise the debt limit in time, including Social Security, the military and certain contractors, as well as on government bonds. It’s far from clear how that would work. “It’s never happened before,” Foster said. If it does, “the political pressure, the financial market pressure and the economic impact that you'd see if this lasted more than a few days — [that] would really build and it would be sufficient to force policymakers to some kind of agreement,” he added. What would the market reaction to prioritization look like?: Recognition that Treasury could meet its obligations to bondholders and certain programs might “allow for more of a ramp towards armageddon, as opposed to flipping a switch,” Tony Roth, the chief investment officer of Wilmington Trust Investment Advisors, told your host late Monday afternoon. That doesn’t mean the reaction would be sanguine, however. Instead, there’d likely be “a very short window” with “very intense pressure” from markets for policymakers to reach an agreement, he said. Democrats like Rep. Brendan Boyle (D-Pa.), the ranking member on House Budget, have argued that investors could hasten the debt limit talks if they were to “accurately price in that risk” of default. Stocks cratered in 2011 as then-President Barack Obama tussled with congressional Republicans over a debt limit package that ultimately led to major government spending cuts. With perhaps a little more than one week to go and no deal on the table, that’s still a possibility. “We will have an important role on Wall Street, but it will be by voting with our feet and moving stock prices to reflect our pleasure or displeasure with whatever deal is being proposed,” Phil Orlando, the chief equity market strategist at Federated Hermes, said in an interview. IT’S TUESDAY — Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.
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